A proposed fourth phase of federal pandemic relief legislation would expand some existing credits and benefits and introduce others as part of a $1 trillion package. The collection of eight bills proposed by Senate Republicans on July 27—dubbed the HEALS (Health, Economic Assistance, Liability Protection and Schools) Act—serves as a starting point for bipartisan negotiations for a new round of economic relief and stimulus legislation following the CARES Act, which became law in March.
Finalized legislation will evolve from the proposed HEALS Act, but its provisions are worth understanding and analyzing for businesses and individuals navigating the economic crisis and the uncertainty therein. Most notably, the act includes:
- Expanded employee retention credits and work opportunity tax credits
- Expansion of the Paycheck Protection Program (PPP)
- Addition of payroll tax and investment credits involving personal protective equipment (PPE)
- Employee benefit provisions
- Additional stimulus payments to individuals
- State tax certainty for employers and employees
- Additional business meal deductions
Detailed anaylsis of tax-related provisions
Expansion of employee retention credit
The employee retention credit was a popular incentive created by the CARES Act, and it would become even more popular under the expansions proposed by the HEALS Act. As it currently functions, the employee retention credit allows for a 50% credit of up to $10,000 in eligible wages paid to employees. The credit is capped at $5,000 per employee for the entire effective period of March 13, 2020, through Dec. 31, 2020. This credit was available to eligible employers, regardless of size, if they were subject to economic hardship due to a government ordered shutdown or a 50% decline in gross receipts. For a more in-depth discussion, please see our previous coverage here.
The HEALS Act proposes significant upgrades to the employee retention credit. Possibly the most significant change is the proposed allowance of eligibility for both the employee retention credit and the PPP loans. The current proposal would allow an eligible employer to use both benefits, but it has a limitation to prevent any overlap of the wages used in the employee retention credit.
Mechanically, the proposed legislation would raise the credit to 65% of eligible wages (up from 50% as in the CARES Act), and it would increase the maximum wages per employee from $10,000 total to $10,000 per quarter, up to a maximum of $30,000 per employee. The CARES Act also had a rule that allowed employers with 100 or fewer employees to claim wages paid to all employees, regardless of whether they were working during the economic hardship. This created a much more favorable outcome when compared to employers with greater than 100 employees, as they could only include wages that were paid to employees for time they were not working due to a COVID-19 economic hardship. The HEALS Act would increase that threshold from 100 to 500 employees, which would allow much greater flexibility in claiming the credit for employers with 500 or fewer employees. Finally, the proposed rules also include a clarification on the treatment of health expenses as qualified wages, to better align with the current IRS FAQ interpretations.
Expansion of Work Opportunity Tax Credit
The HEALS Act creates a new hiring incentive to target workers who lost their jobs due to the pandemic, which will fit in with the preexisting Work Opportunity Tax Credit (WOTC). The criteria for this target group of workers would be that the workers received unemployment benefits in the week directly prior to the week they were newly hired. The act would also increase the currently available WOTC from 40% of the first $6,000 in wages to 50% of the employees’ first $10,000. This proposal also includes an administrative change to remove the limitation on rehires for 2020 COVID-19 unemployment recipients and creates authority for the Treasury Department to provide rules to prevent abuse.
Addition of Personal Protective Equipment Payroll Tax Credit
A payroll tax credit for personal protective equipment (PPE) is one of the entirely new incentives that the HEALS Act proposes. This new payroll tax credit would give employers a 50% credit for expenses incurred for PPE, cleaning supplies, and other various workplace safety expenses purchased between March 13, 2020, and Dec. 31, 2020. This new credit has a phase-out based on the number of employees, which would limit the credit to $1,000 for every employee up to 500 employees, $750 for every employee between 500 and 1000 employees, and $500 for every employee above 1,000 employees. This proposal also includes similar benefits for self-employed individuals, including sole proprietors, independent contractors and farmers, to claim the credit for similar COVID-19-related expenses.
Addition of Investment Credit for PPE Manufacturing
Another new incentive proposed by the HEALS Act is a credit to encourage the manufacturing of designated types of PPE. This new program would create a credit for 30% of a qualified investment in any qualifying medical PPE manufacturing project within the taxable year. This generally includes projects that re-equip, expand, establish or continue a manufacturing facility for the production of certain eligible PPE. The types of PPE that are targeted within this proposal are those specifically listed in section 319F-2(a) of the Public Health Service Act and certain other “textile products for medical applications” identified by the Secretaries of the Treasury and Health and Human Services. Importantly, this proposal would create a $7.5 billion fund that manufacturers would need to apply for a portion of, and it proposes a one-year period to apply and meet criteria within.
Expansion of Paycheck Protection Program
The HEALS Act contains the Continuing PPP Act, which expands the Small Business Administration’s PPP to allow a second draw for certain borrowers, as well as expanding the population of expenses for which loan forgiveness will be granted. Under this proposal, borrowers that meet certain criteria would be eligible for a second round of funding under the PPP. Criteria for borrowers includes, but is not limited to:
- Must be a small business concern or a borrower that meets the alternative size standard, employs less than 300 employees, and with limited exception, had a decline in gross receipts of 50% of more in the first or second quarters of 2020 as compared to 2019.
- Must not be an ineligible business under section 120.110 of title 13, Code of Federal Regulations.
There are a limited number of exceptions to this criteria.
In addition, borrowers can utilize PPP funding for these additional expenditures:
- Covered operations expenditures;
- Covered property damage costs;
- Covered supplier costs; and
- Covered worker protection costs.
The Continuing PPP Act also allows a borrower to elect a covered period between eight weeks and 24 weeks after the date of origination and provides for simplified loan forgiveness applications for borrowers with loans that are $150,000 or less. For borrowers with loans between $150,000 and $2,000,000, the Continuing PPP Act provides streamlined documentation procedures for obtaining loan forgiveness.
Employee benefit provisions
The HEALS Act contains a number of provisions related to employee benefits:
- On-site employee clinics would be eligible health savings accounts expenses through Dec. 31, 2020.
- Individuals could roll over into 2021 unused benefits from 2020 contributions to flexible spending accounts and dependent care flexible spending accounts.
- Gig economy workers, who otherwise are excluded from some employee benefits because they are not considered employees, would have access to certain COVID-19-related benefits (financial assistance from lost business, health care expenses, personal protective equipment and cleaning or training related to COVID-19) tax-free from service recipients and marketplace platform companies. The provision protects the individuals from jeopardizing their independent contractor status if they receive these benefits.
- The HEALS Act also includes some clarifications of CARES Act provisions applying to retirements plans. Specifically, money purchase pension plans qualify for coronavirus-related distribution provisions; retirement plans can rely on a participant’s self-certification that they qualify for increased loan limitations; and the due date for delayed minimum required contributions to single-employer pension plans is Jan. 4, 2021. As these are stated as clarifications rather than expansions of the CARES Act, it would seem that taxpayers can consider these with or without the HEALS Act passing.
Additional stimulus payments
The HEALS Act would provide another $1,200 stimulus payment ($2,400 if married filing jointly), plus $500 per dependent of any age (departing from the CARES Act, which covered only dependents under age 17). The income thresholds for receiving the payments remains the same as under the CARES Act: $75,000 (or $150,000 for married filing jointly), phasing out for incomes over $99,000 (or $198,000 for married filing jointly). Additional measures would apply to these stimulus payments and retroactively to the prior stimulus payments under the CARES Act. Specifically, the payments are protected from bank garnishment or private creditors or debt collectors. In addition, specific prohibitions are included for individuals who passed away prior to Jan. 1, 2020, and those in prison.
State tax certainty for employers and employees
The HEALS Act provides uniform temporary state tax nexus, withholding, and personal income tax relief for employers and employees that largely operate to restore them to their pre-pandemic state tax position. Under these relief provisions:
- Employers with employees working remotely from a jurisdiction other than their primary work location during the covered period will not be deemed to have established either the requisite minimum contacts or substantial nexus for that other jurisdiction to subject the employer to registration, taxation or other related requirements solely based upon the activities of those employees.
- For personal income tax withholding purposes, employees working remotely from a jurisdiction other than their primary work location during the covered period will be deemed to have been working at their primary work location unless the employer implements and maintains a system to track the location where the employees’ work was performed and elects to treat income as earned at that location.
- Employees who perform employment duties in multiple states would be subject to income tax only in their state of residence and any states in which they are present and performing employment duties for more than a limited time during the calendar year (30 days for calendar years beginning before 2025, and 90 days during calendar year 2020).
For the purposes of the provisions, the “covered period” is from the date the employee started working in the other jurisdiction or Jan. 1, 2020, and ending on the earliest of (1) the date the employee is allowed to return to his or her primary work location, (2) the date that 90% of the employer’s permanent work for returns to their primary work location, or (3) Dec. 31, 2020.
Additional business meal deductions
The HEALS Act contains the Supporting America’s Restaurant Workers Act, which includes a provision under which the business meal deduction would be temporarily increased from 50% to 100% for food or beverage expenses provided by a restaurant. The provision would increase the limitation through Dec. 31, 2020.
The HEALS Act also contains many non-tax provisions including:
- Unemployment benefits, claims and processes
- Legal provisions for safe work environments
- Medicare and Medicaid provisions
- Public health provisions for PPE and testing
- Childcare and education provisions, and
- Protections for American innovation and U.S.-made PPE as well as support for semiconductor technology
What happens next
Senate Republicans’ proposal of the HEALS Act amounts to a starting point for negotiations with House Democrats on the fourth phase of pandemic relief legislation. Recall that House Democrats passed their own $3 trillion relief package in mid-May, and it failed to gain bipartisan approval. The difference in spending between the two packages is just one indication of the gap that must be bridged before the next round of relief legislation becomes law. Congressional leaders have expressed hope that an agreement could be reached relatively quickly, but that remains to be seen. In the meantime, RSM’s Coronavirus Resource Center contains the latest tax and macroeconomic insights on the economic and public health crises.